NUA

Submitted by Michelle Peterson on Thu, 2023-12-14 16:53

I recently left my job with a 401K. I have three positions in the 401K: (1) Cash, (2) Mutual Funds, and (3) highly appreciated company stock.

My plan is as follows:
(1) Move the Cash out to an external IRA account for other investment
(2) Move the Mutual Funds out, as is, to an IRA within the same administrator and
(3) Do an NUA on the highly appreciated stock, pay tax on the base, and put the fund into a Stock Brokerage account. My understanding is by doing so, the gain will now be taxed as a long-term capital gain

Question to this forum advisors:
– Is this the right strategy?
– Do I have to do (1) through (3) all at once, or can I execute the plan one at a time?
– If I execute the plan individually, will it risk being disqualified for NUA?

Thank you all for your help and direction.



Submitted by Alan - IRA critic on Thu, 2023-12-14 17:17

  1. It’s only the right strategy if your cost basis is low enough compared to the FMV of the shares. Generally, NUA would not be beneficial if your cost basis exceeds 30% of the value, but a higher % would be OK if you needed funds and intended to sell the shares right after distribution. In that case, you would be reporting taxable income on the entire amount, but some of it would be the lower LTCG rate. If you instead used your IRA money to fund the distribution it would all be at the ordinary income rate.
  2. You must complete all 3 steps, usually in the same calendar year to meet the requirements of a qualified lump sum distribution (LSD). If you completed 1 or 2 this year, but the shares next year you would likely have a disallowed intervening distribution and would then need to have a new triggering event to qualify for NUA on the shares. Time is running out to complete the LSD this year. You should probably wait till next year at this point to avoid the risk that the entire LSD is not completed in time.
  3. You can do these separately, but as indicated they should all be completed in the same year. There is no reason to separate 1 and 2 as a single direct rollover if both are going to the same rollover IRA.
  4. Be sure you have not done an intervening distribution from the plan. This is defined as a partial distribution from the plan after your most recent triggering event, but prior to the LSD year. Triggering events are reaching 59.5, separation from service, disability, or death.
  5. Check with the plan to determine your cost basis amount or %, and that you qualify for an LSD that will produce a 1099R with the cost basis in Box 2a, the NUA in Box 6 and the total distribution box checked.

Submitted by Michelle Peterson on Thu, 2023-12-14 18:03

Thank you for much for the quick response.  I deeply appreciate your insights and glad that the outlined is validated and doable.Here is what I understood:(A) Move (1) Cash and (2) Mutual Funds to one single IRA account. The IRA account has been set-up, so it is a matter of moving it over.  I have two questions to this:a) Moving the Cash is straight forward as the current Administrator just cut a check made to the new IRA account,b) How about the Mutual Funds? I do not want to sell the position. Can the current Administration just move the fund over without converting it into Cash?(B) for NUA, the cost basis is about 12% of the current market value.  Is the assumption that I will only be tax on the cost as an ordinary income, and once I move this into a Stock Trading account, the appreciation will be taxed as long-term tax gain correct?  

Submitted by Alan - IRA critic on Thu, 2023-12-14 23:32

  • Step A:  The non stock portions of the account do not have to be rolled into the same IRA. More than one IRA is allowed. It’s just simpler and reduces the chance of error. With respect to the mutual funds, if the IRA custodian will not accept them they must be sold in the plan and transferred as more cash. If the IRA custodian can hold the funds, they can be transferred in kind to the IRA. Client should have the IRA Custodian review the holdings and indicate which, if any, must be sold.
  • Step B: 12% is quite favorable as the ordinary income portion. That will be taxable in the year of the distribution from the plan. It will also be subject to the 10% penalty unless you separated at 55 or later, or have reached 59.5. The NUA is not taxable until you sell the shares. If the shares lose value before you sell, it just reduces the NUA. If the shares add more gains, the additional gain is also taxed at the LT rate if you sell after a year has passed from the distribution date. If there are more gains, but you sell before the year has passed, the additional gain after distribution is taxable at the ST rate (same as ordinary income). 
  • If you still have the shares when you pass, your beneficiary gets a step up in value for all but the NUA per share. So when they sell the shares the NUA per share remaining will be taxable, but still at the LT rate.
  • Your receiving broker may or may be able to capture the cost basis, but more likely they will treat these as uncovered shares and not show a cost basis on the 1099B when you sell. 
  • Do not reinvest dividends in the brokerage account. Two reasons, first it aggravates any diversification problems, and second it adds more shares that are NOT NUA shares because they were purchased after distribution. Then you would have shares with different cost basis held with your NUA shares. 

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